Pension & Benefits News Employer must pay interest on unpaid withdrawal liability while arbitrating other claims
Tuesday, February 12, 2019

Employer must pay interest on unpaid withdrawal liability while arbitrating other claims

By Pension and Benefits Editorial Staff

A successor employer that lost its bid to avoid paying the withdrawal liability of its predecessor but intends to submit its laches defense to arbitration must pay interest on the unpaid withdrawal liability while the arbitration proceeds, a U.S. district court in California has ruled.

Hawaii hotel. In December 2009, a private equity group agreed to purchase a hotel in Hawaii. The predecessor company, pursuant to a collective bargaining agreement with the hotel workers union, contributed to a multiemployer pension plan for its employees.

Ten days before the deal closed, the predecessor company stopped contributing to the pension plan, and formally withdrew from the plan upon closing. The plan had been underfunded for years before the predecessor company withdrew, and the plan issued annual funding notices to the predecessor company in 2008 and 2009, indicating the plan was underfunded for each plan year since 2006-07. Because there were unfunded vested benefit liabilities on the day the predecessor company withdrew from the plan, the predecessor company had withdrawal liability under ERISA Sec. 4201.

In December 2012, the plan sent a demand letter to the equity group, requesting over $750,000 in withdrawal liability. The equity group paid a little over half, and then sued, contesting its responsibility for the withdrawal liability.

The equity group acknowledged it was a successor, but the federal district court initially concluded that the equity group was not responsible for the withdrawal liability because it lacked “actual notice.” The district court declined to address the equity group's argument that under the doctrine of laches the plan had waited too long to try to collect the withdrawal liability such that the equity group had been prejudiced by the delay. ERISA requires a laches defense to be arbitrated, the court explained.

Ninth Circuit. The Ninth Circuit reversed the lower court's ruling and vacated the judgment. The appellate court held that a constructive notice test is appropriate for withdrawal liability under ERISA. The court explained that because the employer easily could have learned that the plan was underfunded, it had sufficient constructive notice to inherit the predecessor's withdrawal liability.

The Ninth Circuit did not address the laches issue, but the parties stipulated that the employer could demand arbitration of the laches defense. On remand, the equity group acknowledged the plan is an employer for purposes of ERISA withdrawal liability and that ithe equity group must pay withdrawal liability while arbitration is pending. However, it asserted that it need not make interest payments on the delinquent withdrawal liability. The plan countered that under ERISA Reg. §4219.31(c)(2), interest accrues on delinquent withdrawal liability.

The court sided with the plan, ordering the employer to pay $358,181 in unpaid withdrawal liability plus interest totaling over $120,000. In so doing it rejected the employer's contention that a waiver of interest payments was appropriate because the Ninth Circuit had made “new law” with its ruling on constructive notice. It's plain from the Ninth Circuit's ruling, the district court said, that while the appellate court considered the lower court's original decision to be incorrect, the appellate court did not consider its interpretation of ERISA's withdrawal liability provision to be a change in the law.

Further, the plan's initial delay in demanding withdrawal liability is not relevant to any interest owed, which began to accrue only after the plan demanded payment. The extent to which the plan's delay was “undue delay” is the subject of the employer's laches defense, which must be arbitrated.

SOURCE: Heavenly Hana LLC v. Hotel Union & Hotel Industry of Hawaii Pension Plan (DC CA).

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